奧多明尼昂貨運 (ODFL) 2012 Q4 法說會逐字稿

Good morning, and welcome to the fourth-quarter 2012 conference call for Old Dominion Freight Line.

Today's call is being recorded, and will be available for replay beginning today, and through February 24 by dialing 719-457-0820.

The replay passcode is 244-3579.

The replay may also be accessed through February 24 at the Company's website.

This conference call may contain forward looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Old Dominion's expected financial and operating performance.

For this purpose any statements made during this call, that are not statements of historical fact, may be deemed to be forward looking statements.

Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward looking statements.

You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Old Dominion's filings with the Securities and Exchange Commission, and this morning's news release, and consequently actual operations and results may differ materially from the results discussed in the forward looking statement.

The Company undertakes no obligation to update, publicly, any forward looking statements, whether as a result of new information, future events or otherwise.

As a final note before we begin, we welcome your questions today, but ask in fairness to all, that you limit yourself to just a couple of questions at a time before returning to the queue.

Thank you for your cooperation.

At this time, for opening remarks, I'd like to turn the conference over to the Company's Executive Chairman, Mr. Earl Congdon.

Please go ahead sir.

Good morning.

And thanks for joining us today for our fourth-quarter conference call.

With me is David Congdon, Old Dominion's President and CEO; and Wes Frye, the Company's CFO.

After some brief remarks, we will be glad to take your questions.

As you've seen in our news release, revenue increased 8.7% to $527.3 million for the fourth quarter, from $485.1 million for the fourth quarter of 2011.

Net income, though flat at $39.5 million compared to the fourth quarter of 2011, was strong given the harsh weather events, political uncertainty and economic environment experienced during the quarter.

The 5.3% tonnage growth for the fourth quarter was below our expectations despite having an additional workday in the quarter versus the fourth quarter of 2011.

Overall demand, during the quarter, was affected by Hurricane Sandy beginning in late October, and by a series of weather storms in the Midwest and Northeast in December, had the greatest impact on our results with nearly a 50% greater decline in sequential month tonnage per day, as compared to our ten-year average.

Despite the impact of these events, we still expect that Old Dominion's tonnage growth will exceed the average industry performance for the fourth quarter, indicating continuing increases in market share.

Although the economy contracted and demand suffered during the fourth quarter, we are encouraged by our January increases in revenue per day, and weight per day.

While economic uncertainty continues to cloud our visibility into 2013, we will continue to execute performance consistent with the discipline and the business model that have made Old Dominion the leader in the LTL sector throughout the economic cycle.

We have created clear market differentiation, through our value proposition of on-time claims-free service at a fair and equitable price, and as our out performance of the LTL industry has demonstrated for years, we believe demand for this value proposition will only increase over the long term, driving growth in our financial results and shareholder value.

Thank you again for being with us this morning, now here is David Congdon to discuss our fourth quarter operations in more detail.

Thank you, Earl, and good morning.

I will begin this morning by pointing out that the softer industry environment we experienced in the fourth quarter, was more a factor of sluggish demand than intensified competition.

Our pricing during the quarter remained reasonably firm, and with an increase of 3.7% in revenue per hundredweight, excluding fuel surcharge, for the quarter, our pricing met our expectations.

This performance demonstrates the continuing demand for our high-quality services, which are exemplified by our industry leading service standards.

This demand explains why we will continue to invest in sustaining and improving our service standards even in less than robust market conditions.

For the fourth quarter, our cargo claim ratio improved 14 basis points from the fourth quarter of 2011, to a 0.4% of revenue, and our on-time percentage was above 99%.

Our commitment to these standards, in a period of somewhat softer tonnage growth, can result in some loss of efficiency as we consistently meet or exceed our high service standards.

For the fourth quarter, we did experience a slight decline in both P&D stops per hour, and our line haul laden load average.

P&D shipments per hour were flat, and we improved our platform pounds per hour.

The more significant impact on productivity for the fourth quarter, and on our operating ratio, resulted from the greater than expected tonnage decline in December, and the deleveraging effect it had on our operations.

As an example, while we expected an increase in depreciation and amortization as a percent of revenue as a result of our capital expenditures for the year, it was 70 basis points higher than the fourth quarter of 2011.

Over the previous 11 quarters of sustained improvement in our operating ratio, we've often discussed the potential for further operating ratio improvement, given increase density and yield, in a stable economic environment.

We continue to believe that the incremental profit of 15% to 20% is possible in these conditions.

During 2013, we intend to expand our service center network as opportunities become available, although we believe much of our revenue growth will continue to come from further market share gains within our established network.

While our planned CapEx are lower in 2013 than 2012, we also will continue to invest in equipment and service center capacity to ensure that we are prepared to leverage any industry consolidation and growth opportunities.

In addition, our investments in both training and education of our employees, and in productivity enhancing technology will remain priorities.

As Earl mentioned, despite limited visibility regarding the strength of the economy in 2013, we believe we are well positioned to continue outperforming the industry, by remaining true to our core business principles and strategies.

Our business model is time tested, and our fellow employees in the OD family have proven their ability to execute.

Because of these strengths, we are confident we will continue achieving our long-term growth objectives.

Thanks for your interest in Old Dominion, and I will ask Wes to review our financial results for the quarter in greater detail.

Thank you, David, and good morning.

Old Dominion's revenue for the fourth quarter was $527.3 million, an 8.7% increase from the fourth quarter of 2011.

I also note that with a 12.1% growth in revenue for the full year of 2012, we crossed a $2 billion revenue milestone for the first time.

The growth in revenue reflected a 5.3% comparable quarter increase in tonnage, which was 3.6% per day and a 4.5% increase in revenue for hundredweight.

Our tonnage growth was comprised of a 5.1% increase in shipments, and a 1.1% increase in weight per shipment.

Revenue per hundredweight, excluding fuel surcharge, increased 3.7% for the quarter, despite the increase in weight per shipment, and 0.8% decline in average length of haul.

Sequentially, through the quarter, tonnage per day declined 4.5% for October versus September, increased 3.5% for November and declined 12.5% for December versus a ten-year average sequential and expected decline of 2.5% for October and 8.4% for December.

As Earl mentioned, we've been pleased to see tonnage per day bounce back in January with this 7.9% sequential increase versus December against a ten-year average increase of only 1.2%.

Pricing has also remained positive for January with a revenue per hundredweight, excluding fuel surcharge, up 3.2% for the month compared with January of 2012.

Although the first quarter has one less workday compared with the first quarter of last year, that's the first quarter of 2013, I'd also like to point out that Good Friday, which is normally in April, is on the last workday in March, which obviously is also the last day of the quarter.

This will negatively impact our March sequential and year-over-year tonnage growth expectation, although we still expect tonnage per day to increase in a range of 4% to 4.5% year over year for the first quarter.

Based on our experience in the quarter to date, we also expect our revenue per hundredweight, excluding fuel surcharge, to increase in a range of 2.5% to 3% for the first quarter.

Our operating ratio for the fourth quarter was at 87.2%, an increase of 30 basis points over the fourth quarter of 2011.

Clearly the loss of leverage, attributable to a lower-than-expected revenue level, had a negative impact on margins.

By our estimation, Hurricane Sandy caused revenue in October and November to be approximately $2 million lower than expected.

Which when combined with a $7 million revenue reduction in December, due to weather closes in our Midwest and Northeast regions, resulted in $9 million reduct in expected revenue for the fourth quarter.

We believe the contribution margin on this lower revenue level resulted in a negative margin effect of approximately 60 basis points, and $0.03 negative impact on earnings per share.

Capital expenditures for the fourth quarter were $63.5 million, and $373.2 million in the aggregate for 2012.

For 2013 we expect CapEx, net of sales proceeds, to be approximately $270 million, including real estate expenditures of $95 million, equipment expenditures of approximately $150 million, and technology and other expenditures of approximately $25 million.

We expect to fund these expenditures primarily through cash flow as well as our available borrowing capacity, if necessary.

Total debt to total capitalizations improved to 19% at the end of 2012 versus 22.3% at September 30, 2012, and 23.9% at the end of 2011.

Our effective tax rate for the fourth quarter was, of 2012, was 38.6% compared to 34.2% for the fourth quarter of last year, which reflected alternative energy tax credits for an installed solar energy system.

We expect our annual effective tax rate for 2013 will average 38.1%.

This concludes our prepared remarks this morning, and, Operator, we will be happy to open the floor for any questions at this time.

(Operator Instructions)

Scott Group with Wolfe Trahan.

So, I want to understand the tonnage versus margin commentary.

This is the slowest level of tonnage growth in about three years, and the first time we've seen margins contract in three years.

When you think about all the investments you are making in the network, what level of tonnage growth do you think you need to sustain margin improvement going forward?

I think that we certainly have a large investment, $373 million in our CapEx last year was ambitious, but one that we felt was necessary in order to sustain us, our growth for the next few years.

But, I think probably we don't have a number of tonnage growth, but I think that the fourth quarter was, a few things that was unusual, and that's that drop-off in December, which, as I mentioned, was normally, in historical, and expected of just about 8% percent was 12.5%.

And most of that weather all occurred in the last two weeks of December.

And our depreciation went up from 5% last year to 5.7%.

But, I think that next year, with just a normal GDP growth, and a density growth that we expect, we will still see the opportunity for to regain incremental margins and margin improvement.

Okay.

David, I thought I heard you mention that you think you can do 15% to 20% incremental margins going forward.

We've been better than that in the 20% to 30% range the past three or four years.

Is something changing or are you just putting in a level of conservatism in that, in your thoughts?

Well, I'd say it's, to some extent, a level of conservatism in what we might want to say.

But to reiterate what Wes said, as we continue to grow market share and have increased density across our network, combined with maintaining and improving our efficiency levels.

And with a good yield environment which we are seeing, and anticipate going forward at a modestly positive economic environment.

We see continued improvements in our profitable growth and potential for continued improvement in our margins.

Okay.

Great.

Things for the time.

I just want to clarify one thing though, Wes.

The tonnage numbers you gave by month, those were sequentials, I think.

Can you give us the year over years?

Yes, I can.

The year over year in October was just over 4%, call it 4%.

Then November, it was 5.2%.

And then December it was 0.8%.

And January?

January was 5.6%.

Okay.

All right, thanks a lot, guys.

Appreciate it.

Chris Ceraso with Credit Suisse.

So it sounded like when you walk through the revenue per hundredweight that that slowed as you went through the quarter, and then also your outlook for the first quarter, I think you said was also a bit slower, 2% or 2.5%.

What's behind that?

Why is your yield growth slowing?

I think part of it is we're going full circle against tougher and tougher comparisons.

I think the yield environment both in 2012 and 2011 were fairly robust as most of the competition was trying to improve margins, so we're just circling back against a tougher comparison.

Okay.

And that persists, you expect, throughout '13?

Not necessarily, but that's what we are going to see without visibility in at least the first quarter, and we will see how that turns out, whether we become more optimistic on the pricing scenario.

Okay.

And then as a follow-up on the CapEx, which is lower for both real estate and equipment.

Is the idea here that there are fewer opportunities, particularly on the real estate front, or that you need to digest, and integrate, and get leverage out of what you did in 2012?

From a real estate front, Chris, we have added a good bit of capacity this year to our net worth, nearly 5.5% more doors to the network.

And this included some expansion at a couple of our largest break bulks in Morristown, Tennessee, and in Indianapolis.

We've got a couple of major projects still going on in the first half of this year, but most all of our major projects are behind us right now, and the need for investments in real estate are just down a little bit from what they were last year.

Okay.

Thank you very much.

Justin Yagerman with Deutsche Bank.

So Wes, on the tax rate, I'm assuming that some of the lower tax rate is this propane tax that we're starting to hear more about from the extension that we got.

What's the true up in, that they will recognize in first quarter on a year-over-year basis from that?

Yes, just to give you a little more detail on that, Justin, I mentioned in the comments that the average is 38.1%.

If you want to look at it by quarter, by our estimation at this point, the first quarter, that's when we will recognize the tax credit, is probably be around 35.9% in the first quarter, and then average 38.6% the rest of the year.

For the remaining three quarters.

Okay.

That's helpful in thinking about the modeling here.

And then, along the lines of margin expansion and the dependence on tonnage growth, how do you think about your tonnage growth relative to the industry and the market share that you been taking?

What's the long-term rate relative to the market that you guys think is sustainable for OD on a full-year basis?

In terms of your positioning?

What do you mean?

The way of growth in market share or the--

The market is growing X. What do you guys think that you can grow above X as you look out over the long term.

Clearly you have been taking market share, and that's helped.

Just curious how you think about that in terms of your relative positioning?

Well, historically, our rate of growth has ranged between 4% more growth than the market, to sometimes as high as 8% or 9% in any given quarter.

So I'd say 4% or 5% faster than the market.

Okay.

And so, if you've added 5.5% doors, that jives with that thought process, and leaves you a little bit of room, even if the market is flat.

How do you think about network capacity right now, and your ability to leverage any growth above and beyond any industrial growth that we see in the economy this year?

Where would you peg capacity utilization within the network right now?

Over the last four to five years, we have continued to, as you've seen from our CapEx, we have continued to invest in our network and we have carried more capacity in our network than probably any other LTL carrier out there.

And we are in the best shape that we've ever been, right now, for growth, especially because of the significant expansions of two of our major break bulk facilities.

We think that, at this point, we could easily absorb 20% to 25% surge if there were any kind of industry consolidation event.

The depreciation and amortization is embedded in our numbers, and as we continue our market share growth we will be leveraging against that fixed cost.

Okay.

And the last question, along those lines, you guys do play in the long haul a bit.

Have you seen any freight deferral from Arkansas Best so far, as they embark on something you don't have to deal with, a teamster contract negotiation?

Justin, we're winning market share every day, and it is really across the board from all carriers.

I couldn't comment on anything specific as it relates to ABF.

Fair enough.

Thanks for the time guys, appreciate it, as always.

William Greene with Morgan Stanley.

I was curious, if we can get back to some of the long-term numbers, I think you've talked about just, if I'm not mistaken, it is a $3 billion target by 2015 or so, which essentially implies roughly 15% growth or so from here to there.

Does that feel okay, given the market dynamics, given the comps we've got now on the yields, some of the economic uncertainty?

Or do you feel like no, that's still doable, based on what you're seeing from customers?

I think it is doable, but it depends on how we're feeling about the economic activity.

I think with the economic activity that we are feeling at this point, the answer is yes, we will reach that $3 billion without doubt.

And whether it is 2015 or 2016, it is still maybe a little bit shady, but we will get there close to that is our view.

I think when we established that target, we would have expected a little bit faster rebound from the recession in '08, '09, and honestly, the economic growth for our country has been pitiful for these last couple of years.

Indeed.

Okay.

So, second question is just on 3PL.

Some of the brokers noted that they actually saw some strength in LTL volumes in the fourth quarter, and so given your experience, maybe you can remind us, here's how we think about the strategy as it relates to 3PLs, how profitable, maybe, is that business for you?

Do you want to try to cull it or grow it?

Any color around that strategy would be helpful.

We do a fairly significant amount of business with 3PLs.

And when we are pricing accounts within 3PLs, we price each account individually, and we're not giving 3PLs any better deal for that account than if we were dealing with that account on a direct basis.

So that's how we deal with 3PLs, and we are going to stick with that strategy.

Was it notably stronger or weaker in the quarter for them?

Not notably one way or the other.

Okay.

All right, thank you for the time.

Tom Wadewitz with JPMorgan.

Yes, good morning.

I wanted to ask you about your cost inflation, and the productivity opportunities.

How significant they are in 2013?

I'm sorry, say again?

Ask that one more time?

How would you view your cost inflation when you look at wage inflation, depreciation, a combination, and then how much of that, so is it 3%, 4%, where do you think it will be?

And then how material of an offset would you expect from, you are always good at investing in IT and various things that drive productivity?

Obviously, we gave a 3% wage increase in September, so by definition our wage inflation is 3%.

That will be there until we go full circle in September of this year.

So we've been able, in the past, to offset that with price increases, a combination of price increases and also productivity, and we think we will be able to do that this year.

Obviously, in some of the costs, the inflationary pressure is higher, and one obvious thing is in the cost of the equipment, and secondly, in the cost of group health and healthcare, et cetera, which we are still a little bit uncertain about how to evaluate that.

But, I think that we will be able to, with our density improvements, with our pricing, is be able to overcome that inflation and still improve margins.

Okay, but if you said, well overall costs, you think it's you got the 3% wage, but the overall number is probably north of that because of healthcare and equipment, and things that are higher than 3%?

I wouldn't say it's north of that.

The cost of wages, et cetera, is about 50% of our cost.

And there are some costs that we see having no inflation, we will be able to probably hold down because of our own buying efficiencies.

Fuel is an example, of course, fuel is passed through as a fuel surcharge.

But I think that we have certainly the opportunity to keep costs, some costs down, that are also subject to some inflation.

But I think probably the inflation that we will see overall, on average, including everything, is probably will remain in that 3% to 3.5%.

And I think with a combination of our pricing, and combination of our productivity and density improvements, we will be able to overcome that.

Okay.

And so you sound like you have some pretty good conviction on the margin side.

Do think that shows up in first quarter, or is first quarter challenging to see a return to margin improvement given that maybe the weather comparisons, and so forth, are a little bit difficult?

Yes, at this point we are not giving guidance on the first quarter.

Okay.

But your full-year comments is where we should take the confidence on margin improvement?

Well, you can spread that through the whole year.

So I will let you decide if that applies to the first quarter.

But we did give you some, I think in this environment, some pretty positive tonnage growths relative to the market, and also, I think, a fairly stable pricing scenario.

Right.

Okay.

Thank you for the time.

Christian Wetherbee with Citi.

Just thinking about the fourth quarter, you highlighted about $9 million of lost revenue from the storms and Sandy, and the winter storms in December.

I just want to understand if there's anything else we should be thinking about from a cost specific standpoint in the fourth quarter related to those items, or otherwise?

Or if it is more just pretty big decremental margins on that lost revenue, is the right way to think about the fourth-quarter costs?

We always go through a certain amount of actuarial computations, and those costs can change every year depending on what the actuaries say.

So, we may have a little pressure on that.

But the other thing is just on how the quarter ended.

It was, none of the stars were aligned on how the quarter ended from the holiday standpoint, and that just causes a lot of this issue, depending on how Christmas fell, compared to the previous year.

It just affects your costs.

You've got a revenue stream that, all of a sudden, just stops, but you still have your line haul running to try to get that to destination.

So elaborate further, although we say that we had one more workday in the quarter, that includes December counted as 20 days.

And because of New Years Eve and Christmas Eve falling on a Monday, we really only had about 18 and one-third actual good revenue days in the month of December.

It's like Christmas Eve, we might as well have been shut down, we only did $200,000 of revenue, and on New Year's Eve it was about $3 million.

So they were really slow days, and we didn't really have a full 21 days in December.

And, Chris, as I mentioned in my comments, if you want to give 99% plus on-time, you eat that inefficiency and that cost, the shipments got to run.

Whether it's a $200,000 for that day or $8 million.

So that does have an affect that we discussed, but not in terms of quantitatively.

Sure.

That's actually very helpful.

When you think about the December slowdown, was it the last two weeks or so was really when you saw that deceleration?

Obviously, you highlighted those two days at the very end of the month, but was it mid-December is when you started to see volume really trend off hard?

It was.

Even at a conference in early December that we gave an update, and we'd narrowed that range to 5%, 5.5%, but we were saying it was probably going to be closer to have to half, to 5%.

We were still confident that the sequential overall would still be pretty much in the range of the normal sequential down trend from November.

But in the last two weeks of that, just when those storms in the Midwest and the Northeast hit, that just really tempered that.

Then, as Dave mentioned, we had that one day that was only $200,000.

So, that December, in that last part of December, was really the period of time that, you cannot make cost adjustments in that short of time, and so you'd really lose a lot of leverage.

And then, as I mentioned, it has fortunately, has come back in January with almost an 8% sequential increase.

Now, don't take that 8% as nothing too stellar because the denominator in that being December, it was pretty low, but still it was significantly above what would be normal in January.

And we are still seeing some, at this point, and it is early in February, we are still seeing some pretty good sequential trends in February as well.

Early in February, but still seeing good trends.

And the reason why you keep a total tonnage number that's a little bit lower than what you've been seeing for the first six weeks or so, is factoring in, I guess, also you have fewer workdays, and I think you also mentioned Good Friday, a quasi-holiday at the very end.

So we should be thinking about with one fewer workday, and maybe a holiday that's pulling forward into the first quarter, as maybe a little bit lighter from a workday perspective.

Is that, that's the right way to think about it for first quarter?

Yes, that is correct.

I mean It is hard to tell exactly with that Good Friday will have, but typically it will be at least 50% less revenue on that Friday, which would be the strongest Friday of the quarter, obviously, 50%.

Now how much of that Friday revenue will move to earlier in the week or move into April is unclear, but I think it is probably a split between the two, but is difficult to determine.

But you are right, that tempered our overall outlook, sequentially, was that holiday.

Okay.

That's very helpful.

Thank you for the time, I appreciate it.

Okay.

Jason Seidl with Dahlman Rose.

Would it make any sense to try to get some of that broker business back over time, seeing as a lot of your broker business tends to be the smaller customer who probably has better margins that you guys can go after directly?

It is been a long-term trend that the smaller customers are seeing the benefit of using 3PLs to improve their pricing and their systems regarding LTL.

We don't really see that going back, but we've embraced, as David mentioned, we've embraced that the 3PLs are a fact of life.

But on the other hand we've also recognized that we have to be very value-added in price, from our prices, we've been dealing with 3PLs.

And fortunately, the 3PLs are beginning to realize that is not all pricing, that they do need asset-based carriers that provide very high levels of service.

And so I think we've been successfully growing that 3PL business, and, obviously, with our margins, growing it profitably.

Okay.

And shifting gears a little bit, we've concentrated a lot about on tonnage and pricing as we always do on all these calls.

In prior calls you've hinted at potential expansion outside of the LTL realm, and you guys have done.

So could you talk about growing the non-LTL business and what you guys are seeing for 2013?

Our other product lines, our OD Global business, which includes container drayage, LTL back and forth between the United States and all of North America, our ocean freight forwarding business.

And our growth in that area is above the growth rate of the LTL business, and so we see continued expansion in that.

Our expedited business as well, which comprises about say 3% of our total revenue.

We are growing nicely in those areas as well.

And we still have some warehousing business that we are doing on the West Coast and the East Coast that we're trying to pursue and grow in that area as well.

And is this growth, David, all going to be organic or are you guys looking at acquisition as well?

We are pretty much organic.

But we also are fairly often presented with opportunities to do acquisitions in those spaces, and we look at them carefully.

We're between a rock and a hard place on acquisitions like that.

As profitable as we are today and considering the return on capital that we have with our current business, when we start looking at these ancillary businesses, and we look at our desired rate of return, the price we're willing to pay for an acquisition is low.

Compared to what some other people are willing to pay, and so it makes it difficult for us to even do an acquisition.

But anyway, we are doing well, growing organically and, obviously, with an 87.3% operating ratio, or 87.2% operating ratio for the fourth quarter of this year, that is darn respectable.

And we obviously like our current mix of business, and organic growth is working well for us.

I would say that 87% plus percentage is absolutely just fine, and I know that you guys will be prudent about what you pay for acquisitions in the future.

But anyway, that answered my questions.

Guys, again, I appreciate the time as always.

Brad Delco with Stephens.

Congratulations on getting to follow us.

Well, I appreciate that.

Hopefully not too big of shoes to follow in.

Wanted to ask a question, the first one, Wes, on is there any way of breaking down your cost structure between variable and fixed.

Just wonder what that late decline in tonnage versus expectations in December, was there not enough time for you guys to adjust the cost structure, or was there any reason in particular why you kept it as is, in anticipation of business picking back up in the first half?

And that's a good question, Brad, but when you see a significant drop, it is pretty difficult in that short amount of time to really adjust your overall infrastructure at all.

We managed our variable costs pretty well, very well during those latter two weeks of the year, but we were impacted mostly on the fixed cost side of the business.

Yes, but keep in mind that in a sudden drop in revenue that some costs that are normally variable, for example pickup and delivery.

Your pickup and delivery, for example, becomes a fixed cost.

You send that person out, and all of a sudden he goes out, and three businesses that were open the day before are closed today.

And so your shipments per stop, et cetera, goes down.

He becomes a fixed cost, and that has a real deleveraging effect pretty quickly.

Got you.

And then one other item I want to come back to, a noticeable decrease in CapEx this year, and trying to think about that in context of incremental margins.

I think there was a comment that you guys continue to expect to achieve your historical rate of 15% to 20%.

Are we in an environment where that can happen?

Are you seeing any -- is this a CapEx read, or should I be reading from the CapEx guidance that you are expecting less investment on the growth side and trying to achieve better utilization this year?

The CapEx, if you just break it down, last year we spent $143 million on real estate, and this year it is $95 million, so that's a big part of the CapEx reduction.

And then also last year we spent $215 million on equipment, and it's $150 million this year.

And certainly one big reason why that reduction is there is last year CapEx, at $250 million, had a fairly significant amount of catch-up and replacement cycle in it that was as a result of the previous years that we were just holding off some of the CapEx.

But certainly the $150 million this year does include, obviously, some growth, as we already have given guidance in the first quarter.

So it does include some growth in there.

But we also feel like we have some excess capacity with equipment today.

And so we put in a little bit less for our anticipated growth for next year because of the excess capacity with equipment now.

Got you.

Just a quick follow-up on that though.

Do you normally see incremental operating costs associated with making those real estate investments?

And are we going to see less of that this year with reduced CapEx budget on the real estate side?

Investment in real estate, Brad, is not necessarily a variable short-term cost.

We make decisions on our real estate based on what we expect, what we expect our needs are in three and five years, and so it is an upfront cost.

So, obviously, the real estate investment in 2012 of $140 million would have had a slight negative effect on our margins.

But going forward, all of that will come back, not only from a cash flow, but from a margin standpoint.

So we make those decisions on real estate in more of a longer-term perspective, and while it may have a short-term effect on margins, we think the long-term will be much more positive.

Yes, that makes plenty of sense, guys.

Thanks for the time, and appreciate the color.

Matt Brooklier with Longbow Research.

You had two major break bulk facility projects, I think it was in Morristown, Tennessee, and then there was one in Indianapolis.

So just curious to hear if there was incremental expense during maybe third quarter or fourth quarter with those projects that was a headwind, and if, potentially, maybe you lost a little bit of utilization as you transitioned into those bigger spaces?

I don't think we lost utilization, but obviously when you combine both of those projects, we are talking about roughly a $30 million to $35 million investment.

And all of that depreciation, which was capitalized, obviously, would've hit the fourth quarter, and as I mentioned in my comments, overall, because of the lower-than-expected revenue in the fourth quarter, against our depreciation.

Our depreciation was up 70 basis points in the fourth quarter compared to the previous year.

And part of that would've been due to that investment in Indianapolis and Morristown.

Okay.

So it sounds like just the depreciation impact that was the most meaningful during the quarter.

I don't think there was any direct costs or loss of efficiency.

In fact, probably the opposite, we would have been more efficient.

Right.

Expanded the capacity in those facilities.

And as the construction project wound down, because we had to operate around the construction in both of those facilities early in the year, and then when we were able to open those facilities and finish, we became more efficient.

Okay.

Good to hear.

Where are we from a terminal count perspective?

I think you had two new terminals that opened in first quarter of '13, just want to get a sense for what the count is here?

And then maybe as we go through this year, how many additional potential terminals we could add?

What parts of the country do you think there's opportunity to establish new service centers?

At the end of the year, we had 218 service centers, and that was only 2 more than what we had at the end of December.

Okay.

We haven't have our finalized plans for this year, but probably wouldn't open more than two to four service centers this year.

And of course, as we always state and qualify that statement, should there be opportunities that come along, that could change.

And we always are looking for opportunities in areas that, in the longer term, that we know that we want to expand.

Okay.

One of our competitors made some mention of downsizing their network, and that could cause some service centers to come on the market that we're not really thinking about right now that might be opportunities to go into some markets that are on our list.

Okay.

And then getting back to the CapEx side, you walked us through the spend on equipment for '12, and it steps down a little bit in '13.

There was some catch-up and replacement spend in '12.

I'm just curious to hear how much of that catch-up and replacement was driven by bonus depreciation, and then we get half of that going away in '13.

Maybe you could just talk a little bit about how that's impacting your spend from '12 to '13?

Matt, we really base our decisions on equipment based upon our needs from an operating standpoint, not from a depreciation standpoint.

So, although we got the benefit from bonus depreciation, our decisions on when we added the equipment wasn't based on that.

Okay.

Sounds good.

Thank you for the time.

David Roth with Stifel.

With the up coming growth, continue to expanding the network looking to get more freight through there the next couple of years.

Can you talk about how you view your sales force?

How much did it grow in 2012?

Are you looking to grow it any further in 2013?

I think we have maybe a very modest growth in the sales force in '12.

I'd rather not comment on how many we have, but we will probably have some growth in the sales force, especially if we add a few service centers.

But I wouldn't expect any major growth in the sales force for 2013.

Dave, we track sales productivity pretty closely.

So adding salesmen, we always make sure that they are adding revenue, and so even though we added salesmen last year, we also added revenue per salesman.

So we always look at that metric very closely.

Okay, and then can you comment a little bit on the competitive landscape over the past couple months?

We've heard some talk of temporary seasonal pricing out there.

Didn't know if that impacted your volumes in the fourth quarter or not?

We've got a little bit of anecdotal feedback of a little bit of pricing, but nothing that would amount to a trend at all.

But it's hard to tell.

I don't think it affected our December, but if it did, it would be very insignificant.

And lastly, Wes, on the CapEx, tractors versus trailers in the 2013 budget, is that going to be -- is one growing faster than the other?

I assume the bulk of it is tractors.

Well, the bulk of the dollars will be tractors just because they cost $100,000 plus per unit.

But as far as numbers, it is pretty equal.

We try to keep a balanced ratio between tractors and trailers.

Is the average age of the tractor fleet about in line with where you wanted the trailer fleet, about in line with where you want it now?

Yes, that was one reason for our fairly significant spend in 2012, is to get that average age down to a more optimal level.

And I think it is pretty much there.

We've been a little heavier on the trailer spend the last two years, because we actually, by the end of this year, we will have a 100% deck fleet with our trailers.

And we wanted to go that direction, so that's caused us to be a little heavy there.

Excellent, thank you very much.

Ben Hartford with Baird.

Hi, guys, this is Kenton on for Ben.

I had a couple questions, maybe on the expense side.

In terms of the D&A expenses on an absolute basis, do you guys have a rough sense for what that's going to trend like in 2013?

We will give you updates as the year and the quarters progress, but not at this point.

We should see, I'll have to say, that our percentage of revenue should start to temper.

We are certainly not going to see a 30- or a 70-basis points increase in depreciation in 2013 over '12.

It will start to come more of a comparable number probably, and maybe even, depending on the revenue level, maybe even a positive.

Okay.

And then on the purchase transportation side, you had mentioned that some of your non-LTL offerings were growing at a rate above LTL, your LTL growth rate.

Would that have an impact on your expectations in terms of your absolute purchase transportation growth?

Would that trend --?

Well, certainly mathematically our drayage operation is all lease operators, which is accounted for in our income statement as purchase transportation.

And we've seen very good growth in that sector on the drayage.

So, mathematically that would cause our overall purchase transportation to be higher, but it is only because that our drayage operation growing at a pretty good level.

Okay, great.

Thanks, guys.

Todd Fowler with KeyBanc Capital Markets.

Wes, I know it is early, I just wanted to follow up on the comments that you made about February.

The comment that you said was that February has improved sequentially versus where you were in January.

Was that the right comment and then if that was --

Yes, and that's only with about three or four days in February, and that could change depending on weather or other circumstances.

But at least for the three or four days, February is growing with a pretty good expectation.

Now, the expectation in February is that it, sequentially from January, would be tempered because January was so strong relative to December.

Right.

But at this point February is still looking pretty good.

But that's with still quite a few days in February to go.

Yes, I hate to spend a lot of time when we only have a couple of days of trends.

But just to follow-up on that would be then, what do you typically see February versus January?

I think you gave some historical numbers on the sequential improvement from some of the months in the fourth quarter.

What does February historically look like versus January?

The ten-year average in February compared to January is that February should be, from a tonnage standpoint, should be 2.6% higher.

The guidance that we gave for the quarter implies that it would not be that high, simply because January was so strong at 7.9%.

So it's a mathematical thing, not an actual thing.

Got it.

And again, we only have a couple of days so I don't want to dwell too much on it, but that helps.

The only other one I had is, if you wouldn't mind, can you give just a quick reminder on your end market exposure?

I'm just trying to remember how much of your end markets are retail, and furniture and those sorts versus manufacturing.

Yes, we've been usually 40%, 45% manufacturing, about 20% to 25% retail.

And about 20% to 25% on third-party logistics, which includes all of the above, which we don't have the visibility underneath.

Then, the rest of it is made up of some of our container added-value business, et cetera, but that is just a general make up.

And then, within the fourth quarter, was there anything that stood out as far as one of those areas being stronger or weaker than the others?

No.

Not really.

Okay.

I appreciate the time.

Thanks a lot.

David Campbell with Thompson Davis & Company.

Appreciate all your hard work and good results.

I just wanted to clarify one thing about what you said about the first quarter.

You said up 4.5% I think versus last year.

I said up 4% to 4.5%.

4% to 4.5%.

That includes the impact of the Good Friday and one less day, is that correct?

It does, yes.

So on a per-day basis, what was that equal to?

We didn't give that number.

Obviously, on a per-day basis it would be a little more.

Okay.

And the other question I had was weather in February, there's a big storm approaching the Northeast.

How was the weather a year ago?

Are we looking at some possible negative comparisons because of weather?

Potentially at least, the weather is hitting us primarily over this weekend as opposed to middle of the week.

(Multiple speakers).

Let me clarify your previous question about the quarter overall.

It is not one more day in the quarter, it is one less day.

Yes, I know, one less day, right.

And probably, if you look at the tonnage growth, because of the one less day, it will probably end at 2.5% to 3% range.

For total tonnage.

For total tonnage.

Right.

Okay.

And that includes not only the one less day, but the fact that the Good Friday is on the last day of the quarter.

Right.

But in terms of weather, did we have anything comparable last year, do you remember how February was impacted by weather last year?

And that's a positive.

In January, we were up to 5.6%, and if you recall, last January, we had no weather issues at all.

So from that standpoint, January of this year was going up against an easy comp, and still, we were able to increase tonnage by 5.6%.

Right.

Certainly nothing wrong with that.

I gather from other commentaries that January was better, but you are keeping ahead of the industry.

Thank you very much.

Okay, David.

It appears there are no further questions at this time.

Mr. Congdon, I'd like to turn the conference back to you for any additional or closing remarks.

Thank you, and as always we thank you all for your participation.

We appreciate your questions and your support of Old Dominion.

Please feel free to give us a call if you have any further questions, and we look forward to speaking with you on the first quarter call.

Bye.

This does conclude today's conference.

Thank you for your participation.